The Texas Supreme Court recently refused to reinstate an award for physical loss in favor of an apartment complex. The issue on appeal was whether the cost to comply with a municipal ordinance requiring rebuilding a structure to code was covered by either an ordinance or law endorsement or an increased cost of construction endorsement in the complex’s property policy. The court concluded that it was not because of the policy’s anti-concurrent causation clause. Jaw the Pointe, LLC v. Lexington Ins. Co., 2015 WL 1870054 (Tex. April 24, 2015).

An apartment complex was insured along with other complexes under one policy. The complex sustained damage from wind and water from a hurricane, and the insurer paid the estimated cost of damage to the structure. A municipal ordinance required that if a structure were damaged more than 50% of its fair market value, it needed to be rebuilt to code, which in this instance meant demolishing the complex and rebuilding it at base flood elevation. The complex made a claim for this additional cost, but by that time, the insurer had exhausted its policy limits with payments for damage to other complexes. The complex owner sued the insurer, and a jury found in favor of the insured for Insurance Code violations and bad faith for the delay in payment. The insurer appealed.

The insurer argued that the policy did not cover the cost of complying with the ordinance under either endorsement because the damage was caused by both wind and water, and the policy had a water damage exclusion that contained anti-concurrent causation language even if the endorsements did not. The appellate court agreed and vacated the judgment. The insured appealed, and the Texas Supreme Court accepted review.

The insured argued that the wind damage alone was estimated at more than 50% of fair market value and that the insurer knew this. Therefore, the insured argued, the additional coverages still applied. The Supreme Court disagreed, noting that the insured’s permit application did not limit its estimated amount of damage to just the wind damage and the issuance of the permit requiring enforcement of the ordinance did not specify that it was because of wind or water damage. The Supreme Court added that a theoretical possibility that the ordinance could have been enforced on the basis of solely a covered peril was irrelevant because there was no evidence that the ordinance was being enforced on any basis other than the combination of wind and water damage, coverage for which in conjunction with any other cause was excluded.